Harmful tax practice?

21 September 2016

Rebecca Reading

Last week HMRC and the Office of National Statistics released statistics on the uptake of Patent Box, which can give a corporation tax rate as low as 10 per cent on profits arising from the use of patents. This was one of the tax breaks singled out by the EU as being a potentially harmful tax practice and it has already been reformed in response to the OECD’s international tax clampdown.

The original rules came in from 1 April 2013, and these are the first statistics available on their uptake. Companies in the manufacturing sector were found to have made the most claims and gained the greatest monetary benefit. In total 700 companies benefited in the first year, with about two thirds being SMEs or micro businesses. Only a third of the beneficiaries were large companies, although naturally in terms of value the large companies gained the most.

Patent Box was designed to encourage companies to locate high-value jobs, associated with the development, manufacture and exploitation of patents, in the UK. The statistics in the report appear to show the policy has worked, although the ONS stops short of making any comment on this. The law change following the OECD’s recommendations is mentioned briefly, followed by a statement that this change is expected to have “some impact on future trends of Patent Box claims”.

This bland remark captures brilliantly the policy maker’s dilemma. Changing Patent Box in response to the OECD is meant to be a tax avoidance clampdown, and the government has been so committed to toeing the OECD line that they have to be seen to do something in spite of there being no obvious avoidance issue. If Patent Box really was a harmful tax practice, it seems that no-one will ever be able to prove it.

If you would like to discuss any of the points raised, please contact Rebecca Reading or your usual RSM contact.

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